Frontier Market Ratings Mostly Stable, Challenges Await in 2019

Fitch-rated frontier markets saw more positive than negative sovereign rating actions in 2018, partly due to higher commodity prices, Fitch Ratings says. Some frontier markets still face challenges in the coming year, as highlighted by more recent rating actions. The nature of these challenges and relative vulnerabilities vary from region to region and sovereign to sovereign.

Of the 30 Fitch-rated frontier markets, 13 saw positive rating actions last year, compared with six negative actions. The majority were Outlook changes. The mix of upgrades and downgrades was balanced at four each.

Almost three-quarters of ratings are in the ‘B’ category. Most Outlooks are Stable, and the number of Positive and Negative Outlooks is balanced (four each). But low ratings highlight persistent vulnerabilities, which may include weak public and external finances, exposure to global monetary tightening, and political risks.

Over one-third of our frontier market ratings are in sub-Saharan Africa, where a period of higher oil prices eased external vulnerabilities and supported growth among exporters. Combined with wider reforms (for example more flexible foreign exchange regimes or devaluations), sometimes supported by IMF programmes, this supported the revisions of the Outlooks on Angola, Gabon and Nigeria to Stable from Negative in 2018. Our stabilisation of Kenya’s Outlook reflected strengthening economic growth, and fiscal consolidation.

Zambia’s Outlook remains Negative despite the downgrade to ‘B-‘ in October 2018 following substantial upward revision of budget deficit targets. Mozambique remains in default on external debt, although progress has been made in discussions with Eurobond holders. Both countries are seeking arrangements with the IMF, as is Angola.

IMF programmes can provide a policy anchor, but implementation can be challenging. In Tunisia, implementation risks remain high given social discontent and elections due at end-2019. In contrast, Egypt’s programme is broadly on track, and we expect further subsidy reforms and expenditure control. We revised the Outlook on Tunisia’s ‘B+’ rating to Negative, and on Egypt’s ‘B’ rating to Positive, last year.

Rating actions were balanced in Asia in 2018. We downgraded Pakistan and Sri Lanka in December. Both countries face external pressures and refinancing risks, and these were exacerbated in Sri Lanka by October’s political crisis. IMF assistance may eventually be forthcoming in Pakistan, which has engaged in programme discussions, and Sri Lanka appears keen to resume its programme. Mongolia’s July upgrade reflected improved fiscal metrics from the rise in commodity prices and progress in meeting key IMF programme targets. Continued high and stable growth rates, current account surpluses and rising FDI inflows drove Vietnam’s upgrade in May.

In the Americas, Ecuador was downgraded to ‘B-‘ in August 2018 and placed on Negative Outlook on 10 January 2019 to reflect its large 2019-2020 financing needs and uncertain funding sources in the context of tighter global financing conditions. Costa Rica is on Negative Outlook following its 15 January 2019 two-notch downgrade to ‘B+’, due to ongoing uncertainty surrounding government financing amid high interest rates and shorter debt maturities. El Salvador’s passage of its 2019 budget and legislative approval for new external bond issuance to cover an USD800 million bond due in December are important steps to mitigating short-term political risks to fiscal stability and debt rollover risks.

Paraguay’s December 2018 upgrade to ‘BB+’ reflected its resilience to external shocks, including Brazil’s recession. It is the joint-highest Fitch-rated frontier market, with Azerbaijan and Namibia. Jamaica and Suriname also experienced positive rating actions in 2018.

Emerging Europe frontier market sovereigns are generally less exposed to global financial conditions, growth prospects are favourable, and economic policy frameworks have generally improved. We have Positive Outlooks on Armenia and Georgia. The Outlook on Azerbaijan’s ‘BB+’ rating was stabilised last year, due to greater macro stability and a strengthening external balance sheet, despite policy credibility weaknesses. Our upgrade of Belarus at the start of 2018 reflected lower near-term external financing risks.